Investors interested in investing in resource companies are often drawn to resource exploration companies due to the high upside potential of serious and talented explorers. Exploration-focused resource companies can produce fantastic returns for investors when chosen properly. Unfortunately many resource exploration companies make for terrible investments for a number of reasons.
The most obvious reason is a failure to make a significant/commercial discovery; this is the basic risk that every exploration company faces. Additionally, exploration companies require capital to engage in serious exploration, so any potential investor should look carefully at the financials of a prospective investment candidate. Do they have the required cash-on-hand to execute an exciting exploration program? Another even more important consideration is the character and track record of management. A management team that has had major past success will have more success in raising funds on favourable terms and is more likely to have the skills and experience to duplicate such success again in the future. Alternatively, resource exploration companies run by unscrupulous management also offer particular opportunities to defraud investors and such companies are always poor candidates for investment. Questionable exploration companies are often also the subject of paid stock promotion campaigns pitching investors on the supposed "Blue Sky" potential of the firms' properties. An example of such a company is Legend Oil and Gas (OTCPK:LOGL), which ostensibly operates as an oil and gas exploration and production company, but as I examined here, here, here and here, has corrupt management, marginal assets and appears to have been the subject of a "Pump and Dump" scheme utilizing numerous paid stock promoters. Since my initial articles exposing LOGL, its shares have rapidly declined from a $2.05 open on November 21, 2011 when I first reported on the stock, recently touching $0.31 on May 8, 2012, a loss of 85% in about five and a half months.
Today's article will focus on American Liberty Petroleum (OREO.ob), another $100 million market cap company that is also, at least superficially an oil exploration company, but that I believe also possesses corrupt management, minimal current business activity, marginal assets and appears to be the subject of a major 7-figure "Pump and Dump" campaign utilizing paid stock touts. This article will examine both OREO's underlying business, assets and the suspicious past activities and questionable corporate associations of OREO's sole director/member of management and largest shareholder: Chairman/CEO Alvaro Vollmers and OREO's controlling shareholder, John Rhoden. Although OREO shares have already declined by over 50% from their high, at this point in time I believe the fair value for OREO shares is 90% below the current market price.
In its 2011 10-K, American Liberty Petroleum describes itself as "an independent oil and gas company engaged in the acquisition, drilling and production of oil and natural gas properties and prospects." Page 2 of the 10-K reveals that it has interests in 6 leases in Nevada representing 13,717.84 gross acres. It also reveals the company is a non-operator and is responsible for 60 - 75% of any capital expenditures and entitled to 48 - 63.3% any revenue generated. Examination of the balance sheet in the most recent 10-Q reveals the company has never produced any oil/gas, generated any cash flow or revenue and has $1,487,917 in total assets including $0 of cash and $1,284,724 of Oil and Gas Properties. The company's board of directors consists only of CEO/Chairman Alvaro Vollmers and the company also has no employees, other than Mr. Vollmers.
Examination of its financial statements reveals that OREO is risky in the sense that it is purely an exploration play, as opposed to an exploration and production company that generates cash flow and therefore has a likely floor price. The lack of liquidity/assets is certainly of concern to its future prospects and the company even admits as much in its own filings with the SEC. OREO discloses in its most recent 10-K that its "independent auditors, have expressed substantial doubt about our ability to continue as a going concern." It is also disclosed that OREO is a highly speculative investment lacking in tangible assets and oil/gas reserves, with page 7 of the 2011 10-K revealing:
"We have no oil and natural gas reserves."
CEO and Chairman/Sole Director Alvaro Vollmers Creates Millions of Dollars on Paper for Himself and Controlling Shareholder John Rhoden Via a Series of Corporate Transactions
American Liberty Petroleum began its current corporate incarnation when shell company Oreon Rental Corporation was purchased by OREO's current CEO and Chairman/Sole Director, Alberto Vollmers. This SC13D filing outlines the terms of the transaction:
"On May 4, 2010, Dzvenyslava Protskiv transferred 1,550,000 shares of Common Stock, $0.00001 par value ("Common Stock"), of Oreon to Vollmers for cash consideration of $155.00, pursuant to a stock purchase agreement between the two of them and John Rhoden, a private investor. Vollmers used his personal funds for the purchase price…The purpose of the transaction was to complete the sale of a controlling interest in the Company from the former sole officer, director and majority shareholder, Ms. Protskiv, to Vollmers…Prior to May 4, 2010, Ms. Protskiv owned 2,000,000 shares of Common Stock, or 76.6% of the issued and outstanding shares of Common Stock. Immediately after the closing of the transactions contemplated by the stock purchase agreement, Ms. Protskiv owned no shares, and Mr. Vollmers owned 59.4% of the issued and outstanding shares of Common Stock. Mr. Rhoden purchased 450,000 shares of Common Stock of the Company pursuant to the same stock purchase agreement."
Revealed in this SC13D filing, John Rhoden's shares cost him $45. The $200 valuation for the 76.6% stake represented by the 2 million shares implies a valuation of $261 for the full 2.61 million shares of the company. While a purchase price of two-hundred and sixty-one dollars for a relatively clean, publicly traded shell company may seem cheap, the figure is confirmed via the form 4 filing for Mr. Vollmers and SC13D filing for Mr. Rhoden associated with the transaction.
In this form 4 filing from May 26, 2010 we can see that Vollmers returned 1.40 million shares to the company treasury to be cancelled, leaving the company capitalized with 1.21 million shares, 450K of which were held by Mr. Rhoden and 150K held by Mr. Volmers. Based on his shareholdings, Mr. Rhoden appears to be the senior partner in the deal. The management then proceeded to split the stock 70 for 1, as is documented on page 23 of OREO's 2011 10-K. The result of this transaction was that Alvaro Vollmers owned 10.5 million shares, while John Rhoden now owned 31.5 million shares. At a closing price of $0.94 on May 8th, 2012, today these stakes represent $9.9M and $29.6M, respectively.
A reverse merger transaction into a shell company concurrent with a stock split is a suspicious corporate transaction that is often indicative of a "Pump and Dump" scheme because it creates millions of shares the price of which can be propped up because of an initially tightly-held/manipulated float concurrent with stock promotion. A similar transaction also occurred at Legend Oil and Gas as highlighted in my earlier article here and the SEC has also warned investors about the risks of investing in reverse merger stocks like OREO in a recent bulletin available here.
CEO and Chairman/Sole Director Alvaro Vollmers Converts a Related-Party Debt into 10.5 million shares at $0.0557/share in April 2011; a warrant to buy another 10.5 million shares at $0.09/share
OREO accrued a debt with another of Alvaro Vollmers' companies Keyser Resources. OREO's 2011 10-K reveals the details of the conversion of this debt into OREO common shares at a price per share of $0.0557:
"In December 2010 through March 2011, the Company borrowed a total of $585,000 from Keyser Resources, Inc. The promissory notes executed by the Company in connection with the loan contained the following payment terms: (NYSE:A) the unpaid principal amount accrued interest at the rate of six percent (6%) per annum, (NYSE:B) the unpaid principal (after extension) and all accrued but unpaid interest thereon was due and payable on April 30, 2011, and (NYSE:C) the unpaid principal and accrued but unpaid interest could be prepaid in whole or in part at the option of the Company, without penalty or premium. The notes were not secured by any assets of the Company. In addition to serving as the Company's sole director and executive officer, Mr. Vollmers was, at the time, also the sole director and officer of Keyser and owned approximately 10% of its outstanding common stock. Keyser transferred the notes to New World in April 2011. New World transferred the notes to the Company in April 2011 and, in exchange, received 10,500,000 shares of common stock and the New World Warrant."
Note 3 of the 10-K reveals details about the warrant in question:
"On April 13, 2011, the Promissory Notes and related accrued interest were canceled. In exchange, the holder of the Notes, New World Petroleum Investments, received 10,500,000 shares of the Company's Common Stock and a warrant to purchase an additional 10,500,000 shares of the Company's Common Stock at $0.09 per share (the "New World Warrant")."
For reasons which are not revealed, Vollmers transferred the promissory note to New World Petroleum Investments and they are the recipients of the 10.5 million shares and warrant to buy another 10.5 million at $0.09/share. New World also surfaces again when looking at OREO's history of equity financings and it appears that they, along with Vollmers and Rhoden are key players in the scheme.
A Series of Significantly Below Market Price Private Placements to New World Petroleum and Other Undisclosed Investors
Note 4 of OREO's most recent 10-K reveals a number of historical private placements of the company's stock to New World Petroleum and other undisclosed investors at significantly below the current market price of the stock (price/share in bold added by author):
- "On February 19, 2010 ALP completed a private placement of 875,000 Units. The gross proceeds of the offering were $50,000, which were used to pay general operating expenses. ($0.057/unit)
- On April 27, 2010, ALP completed a private placement of 875,000 Units. The gross proceeds of the offering were $50,000, which were used to pay a portion of the payments due under the Option Agreement and the Company's general operating expenses. ($0.057/unit)
- On April 30, 2010, ALP completed a private placement of 5,250,000 Units. The gross proceeds of the offering were $300,000, which were used to pay a portion of the payments due under the Option Agreement and the Company's general operating expenses. ($0.057/unit)
- On May 25, 2010, the Company issued 2,187,500 shares of Common Stock to New World Petroleum Corp. at a price of approximately $0.057 per share, as repayment of an $125,000 installment paid on behalf of the Company under the Option Agreement. ($0.057/share)
- On June 2, 2010, the Company completed a private placement of 3,500,000 Units, with each Unit consisting of 1 share of Common Stock, and 1 warrant to buy a share of Common Stock at an exercise price of approximately $0.091 any time within 3 years after issuance. The Units were sold to a single purchaser at a price of approximately $0.057 per Unit. The gross proceeds of the offering were $200,000, which were used to make certain payments under the Option Agreement. ($0.057/unit)
- On June 30, 2010 the Company issued 1,500,000 shares of restricted Common Stock valued at $85,714 to Desert Discoveries to fulfill the Company's obligation under the Option Agreement. ($0.057/share)
- On September 23, 2010, the Company completed a private placement of 1,750,000 Units, with each Unit consisting of 1 share of Common Stock, and 1 warrant to buy a share of Common Stock at an exercise price of approximately $0.09 any time within 3 years after issuance. The Units were sold to a single purchaser at a price of approximately $0.057 per Unit. The gross proceeds of the offering were $100,000, which were used to make certain payments under the Option Agreement and the Company's general operating expenses. ($0.057/unit)"
Adding up all these figures reveals that there are at least 15 million shares currently outstanding with an average cost of $0.057/share, as well as millions of long-term warrants issued at $0.09/share. This is in addition to the tens of millions of shares created by Vollmers via the other corporate transactions listed earlier. Considering all of this stock issued at such low prices, investors would be wise to ask themselves why exactly the stock is currently trading just shy of $1/share and if this current valuation is realistic in light of the recent placement/share manufacture below 10 cents.
OREO Stock is Being Aggressively Pushed by Multiple Paid Stock Promoters at a 7-Figure Cost
One explanation for the current price of OREO stock is that during 2012, it has been aggressively pushed and touted by numerous paid stock promoters. Use of paid stock promoters is often indicative of "Pump and Dump" fraud, a practice which the SEC highlights here.
One of the paid stock shills currently touting OREO's stock is James Rapholz and an example of such a piece can be seen here. Rapholz should be a familiar name to those who followed Legend Oil and Gas , the company whose 85% decline I predicted five and a half months ago, as he was also one of several high-profile, paid cheerleaders of LOGL's stock. Note the disclaimer:
"This paid email advertisement by James L. Rapholz' Economic Advice (hereafter "JREA") does not purport to provide an analysis of any company's financial position, operations, or prospects and this is not to be construed as a recommendation by JREA, or an offer to sell or solicitation to buy or sell any security. American Liberty Petroleum (hereafter "OREO"), the company featured in this issue, appears as paid advertising. Foster Media has paid one hundred and forty thousand dollars for the dissemination of this info to enhance public awareness for OREO... James L. Rapholz has received seven thousand five hundred dollars for this and related marketing materials. James L. Rapholz/JREA also expects to receive new subscriber revenue, the amount which is unknown at this time, as a result of this advertising effort."
Rapholz's piece is typical of paid stock promotion material, aggressively urging the reader to"Buy OREO now", making wildly optimistic predictions and share price targets and speculating about a potential takeover from a larger industry player, in this case Occidental Petroleum (NYSE:OXY). Rapholz exclaims:
"Does that mean OREO should be selling at around $689 a share!?!? Wouldn't that be nice, especially with OREO around $1.50 for the moment! As an analyst, I have to apply oilfield economics to the valuation of OREO shares and I feel conservatively comfortable projecting OREO's current value to $15.00 a share."
A $1.5 billion dollar valuation for a company with marginal properties, no production, only $1.5 million in tangible assets and no proven reserve base is not conservative analysis as Rapholz suggests.
A so-called research report from the firm Grass Roots Research giving OREO shares a $3.85 target price is no more than a paid-for tout piece. Upon landing on the Grass Roots Research website one can immediately see evidence of this that this is not a serious/objective research company. In fact, it isn't a real research company at all, it is "an Investor Relations firm focused on Investor Awareness programs for its clients"; that is a nice way of saying it is a stock promoter who will tout your stock for a price. The company admits as much, boasting:
"Through April 26, 2012, 90%+ of all 133 initiate coverage stock research reports, 100% of our investment awareness email blast campaigns rose in excess of 90%, while 80%+ of all stocks increased their volume. The large share price increases are more due to funds spent for investment awareness campaigns."
What they neglect to mention is that after initial rises in price due to investors being attracted to the stocks covered by the "investor awareness" campaigns, over the medium to longer term, companies that they cover have historically resulted in severe losses for shareholders. A list of their previously covered stocks is available here. There are so many companies on the list, that reviewing them all is impractical, however a simple sampling of the subjects historical performance reveals charts indicative of "Pump and Dump" schemes and the typical resulting catastrophic losses for ordinary investors.
Taking a look at the charts of the first 3 listed energy companies is instructive:
AER Energy Resources (OTC:AERN)
American Eagle Energy Resources (OTC:AMZG)
American Petro-Hunter (OTCPK:AAPH)
The promotional piece for OREO can currently be downloaded here. This promotional piece has a professional appearance, and applies techniques such as discounted cash flow analysis to arrive at a price target for OREO's shares. Through the use of these techniques, the promotional piece attempts to project an image of legitimate investment research but further examination reveals that these models are more-or-less useless because they are built around highly unrealistic assumptions. For example, the base case scenario envisioned in the piece projects OREO producing $25 million in operating cash flow by 2015, requiring only $8.5 million in capital expenditures, issuing no new shares and only an additional $1.0 million in debt financing in the process. Even in the oil industry, these types of return on capital are unrealistic, particularly as it relates to unconventional or difficult geological conditions and basing a valuation target around figures like these represents the poorest type of stock "analysis" available. The disclaimer on the piece provides some insight into the motivation for the unrealistic projections, reading:
"Grass Roots Research and Distribution Inc. (GRRD) distributes research and other Information purchased and compiled from outside sources and analysts. This report/release/advertisement is a commercial advertisement and is for general Information purposes only. Do not base any investment decision or rely on Information in this commercial advertisement including financial projections, price targets which are academic theory, buy/sell and trading recommendations and forecasted business prospects… The company has paid $15,000 for this commercial advertisement."
In addition to the online promotions outlined above, there is also evidence of a physical promotional mailer campaign documented here, here and here. The disclaimer in the physical mailer reveals a 7-figure promotional budget: "Foster Media has paid $1,768,000 for the dissemination of this info to enhance public awareness for OREO..."
As if all these paid promotions weren't enough, here is an additional 9 pages of links to other documented paid stock promotional material touting OREO's stock. All together, the amount spent on promoting OREO's stock in 2012 seems to exceed $2.5 million. Prospective and existing investors should ask themselves, if the properties held by OREO truly held so much potential, wouldn't all this money spent on advertising OREO's stock be better spent drilling and trying to produce oil and cashflow?
CEO and Chairman/Sole Director Alvaro Vollmers Was the Former CEO/CFO of Another Heavily Promoted Oil Company with Links to John Rhoden Which Resulted in Catastrophic Losses for Ordinary Shareholders of over 99% in 2008-2009
OREO isn't the first resource exploration company with marginal business activities and strong ties to CEO/Chairman/sole director Alvaro Vollmers and controlling shareholder John Rhoden which has been the subject of major paid stock promotion campaigns resulting in severe losses for shareholders.
Page 29 of OREO's most recent 10-K gives a bio of Alvaro Vollmers, it reveals a corporate association worth noting:
"Alvaro Vollmers is the sole director, President, Secretary and Treasurer. Mr. Vollmers was appointed to the board of directors and was appointed President, Treasurer and Secretary of the Company on January 4, 2010. Since April 2009, Mr. Vollmers has served as President and CEO of Bald Eagle Energy, Inc., a Nevada corporation ("Bald Eagle"), which is traded in the pink sheets and has been engaged in the acquisition, exploration and development of oil and natural gas properties and prospects. In addition, Mr. Vollmers has served as Bald Eagle's CFO since March 2008 and has been a member of its board of directors since April 1, 2008."
Examination of Bald Eagle Energy's 2008 10-K reveals numerous similarities to American Liberty Petroleum. One similarity is the tens of millions of shares issued at almost zero-cost. In BEEI's case, examination of the Statement of Stockholder Equity reveals that by the end of 2008, this figure represented 70 million shares issued for a total of $30.1K, or about $0.00043 per share. Another similarity is the fact that between them, John Rhoden and Alvaro Vollmers controlled over 50% of the shares of the company, or 40 million shares. A third important similarity is that like OREO, BEEI was the subject of numerous paid promotional pieces touting the stock. Examples of such pieces can be seen here, here and here. Note the disclaimer from the first 2 links:
"Chillon Investments has paid $125,000 for this advertising effort. Myers` Secret Stocks, Inc. was paid $5000 and expects to receive new subscriber revenue as a result of this advertising effort."
As in the pieces touting OREO's stock, the BEEI promotion hyped up the supposed potential of the properties claiming that they could be sitting on $9 billion worth in oil, urging readers to aggressively buy BEEI's stock. Despite this, the reality that the company had no significant assets caught up with BEEI shares and the company "went dark" and stopped filing with the SEC, filing their last 8-K in September 2009.
Additionally, like OREO, despite the optimistic predictions about the company from paid promoters, the truth was that by the time BEEI filed its final 10-Q in August 2009, the company had never produced a single barrel of oil or made any significant discovery during its tenure as a public company.
A review of the stock chart for BEEI for the time period of Mr. Vollmer's tenure at the company reveals a catastrophic investment for investors with a loss of over 99% within 2 years of Mr. Vollmers' association with the company and looks indicative of a "Pump and Dump" scheme.
(click to enlarge)
Vollmers, Rhoden and New World Petroleum Also Have Ties to Liberty Gold Corp., Another Heavily Promoted Resource Exploration Company that Resulted in Severe Shareholder Losses
Liberty Gold Corp. (LSTG.ob) is another heavily promoted resource exploration company with ties to both John Rhoden and Alvaro Vollmers. LSTG, ostensibly a Gold Exploration company with a property in Mexico began its life as Keyser Resources, a shell company majority owned by Alvaro Vollmers. While based on its most recent 10-K filing, it appears Vollmers is no longer a shareholder in the company, having supposedly sold his whole stake in the company to current CEO Dan Ferris, John Rhoden remains the main company shareholder with 22.5 million shares. Of note, the majority of these shares were also created in a June 17, 2011 20:1 forward stock split, a share-printing transaction similar to that which occurred at OREO. New World Petroleum also shows up, buying millions of shares of LSTG in several significantly below-market private placements completed in early 2011 listed in on page F-14 of the latest 10-K:
"On December 3, 2010, the Company issued 6,000,000 Units to New World in a private placement, with each Unit consisting of one share of the Company's $0.001 par value common stock and one warrant to purchase a share of the Company's $0.001 par value common stock at $0.0625 at any time within 3 years, for cash proceeds of $300,000. The relative fair value of the warrants issued was $46,500.
On January 3, 2011, the Company issued 3,000,000 Units to New World in a private placement, with each Unit consisting one share of the Company's $0.001 par value common stock and one warrant to purchase a share of the Company's $0.001 par value common stock at $0.0625 at any time until January 3, 2014, for cash proceeds of $150,000. On January 6, 2011, the Company completed a private placement of an additional 3,000,000 Units to New World on similar terms, for cash proceeds of $150,000. The relative fair value of the warrants issued was $46,000. All shares of common stock and warrants issued to New World have been redeemed."
- "Lone Star Gold Corp. (hereafter "LSTG"), the company featured in this issue, appears as paid advertising. Mermaid Financial has paid $200,000 for the dissemination of this info to enhance public awareness for LSTG."
- "Lone Star Gold Corp. (hereafter "LSTG"), the company featured in this issue, appears as paid advertising. Mermaid Finance Ltd has paid $100,000 for the dissemination of this info to enhance public awareness for LSTG."
In this case, the paid stock promoters caused some controversy by claiming the LSTG was positioned as a takeover target for industry giant, Goldcorp (NYSE:G), in a transaction that would have net shareholders fantastic, multiple times return on investment. The problem was that it was completely untrue, as documented by an article in the Vancouver Sun, available here. Goldcorp wasn't looking to takeover LSTG as it believed that LSTG properties were marginal and did not contain attractive, economic gold deposits. Note that this is a very similar tactic to that used by the promotional pieces for OREO except that Goldcorp is replaced with Occidental Petroleum . Considering that OREO has not made any discoveries of economically recoverable oil, OXY's interest in such a takeover in this case is also highly suspect.
LSTG has been a complete disaster for shareholders, declining from a high in September 2011 of $1.40 per share to $0.16 per share on May 8, 2012, representing a loss of 88.6% in less than 9 months.
OREO's Properties: Previous Owner Disposed of Interest in the Hyped-Up Nye Leases For Almost No Consideration Due to Poor Drilling Results in 2006 and 2010
It its most recent 10-K OREO reveals that the focus of any exploration efforts conducted will be on the Gabbs and Kibby Flat projects in Nevada. The company reveals in the 10-K that no drilling has been conducted to date on the Kibby Flat property, therefore there is absolutely no information on if this property contains any oil whatsoever. The Nye County Gabbs Project however, which is subject to a great deal of hype in OREO's paid promotional pieces has been drilled before but the facts do not support the story being told by promoters. OREO reveals on page 4 of the 10-K that:
"The Company owns a 60% Working Interest in the Cortez Lease and the two wells located on the lease - the 1-12 Cobble Cuesta and the 2-12 Paradise. The 1-12 Cobble Cuesta was drilled in the fall of 2006 and the 2-12 Paradise was drilled during the fall of 2010, both by Empire Petroleum (OTC:BB EMPR)"
To learn about the history of this drilling activity, it is instructive to look at the most recent 10-K for Empire Petroleum, which reveals:
"In 2006, a test well, the Empire Cobble Cuesta 1-12-12N-34E, Nye County, Nevada was drilled to a depth of 5,195 feet. The well encountered a volcanic formation at 1,760 feet and scattered oil shows from 2,000 feet to total depth. After reaching 5,195 feet, the Company and its partners elected to suspend operations on the well, release the drilling rig, and associated equipment and personnel to evaluate the drilling and logging data. After the study was completed, Empire and its partners decided to conduct a thorough testing program on the well. The Company re-entered the well on April 17, 2007 and conducted a series of drill stem tests and recovered only drilling mud…
During 2010, the Company had a new Federal drilling unit formed and approved by the Bureau of Land Management ("BLM"). This unit was formed according to the Company's plans to drill a second test well on the prospect to be known as the Empire Paradise Unit 2-12. This test well was to be drilled to 6,000 feet, or 500 feet into the Triassic formation or into a zone that establishes commercial production at a lesser depth. Drilling operations were commenced July 19, 2010 and ceased on November 5, 2010. During the drilling phase, the Company had several zones where oil shows were observed. During its test from 3,698' to 3,786' a small amount of oil was recovered. Drilling continued to 4,248', encountering additional oil shows and the decision was made to set 7" production casing to 4,225'. A further attempt to deepen the hole failed when a heavy water flow was encountered at 4,248'. One further test through the pipe at 4,140' to 4,167' tested water. It was then decided to test the area between 3,700' to 3,782'. Oil was recovered from this interval and was swabbed at the rate of three (3) to five (5) barrels of oil per day. The recovered oil contained a significant amount of paraffin, which could have restricted the oil production. The Company then made the decision to plug the well, considering it to be non-commercial. One of the parties that had farmed out their interest to Empire for drilling the 2-12 test well asked for an assignment of the lease on which the well was drilled. Empire agreed to this assignment subject to such party's assumption of the plugging liabilities of both the 1-12 and 2-12 wells, plus the reclaiming and seeding of the two well sites and replacing Empire's $25,000 drilling bond."
As we can see from the above transaction, by the end of 2010, Empire viewed the property as so uneconomical that they disposed of their interest in it for no additional consideration in order to avoid minor liabilities associated with plugging the well and a small, $25K bond. While it is true that technological progress in terms of recovering oil from difficult formations has improved over the past decade, technology has not improved so much in the last 18 months that it is plausible that Empire simply decided to dispose of a potentially multi-billion barrel production target, for next to no consideration. While the promoters suggest OREO's land position could be worth billions, the facts suggest that the land position is extremely marginal. Based on the latest data from the US Energy Information Agency ("EIA"), we can see that in 2009 the entire state of Nevada had only 70 producing oil wells producing an average 16.4 bbls/day each, not exactly "gushers". We can therefore conclude that OREO's completely unexplored properties are also likely not particularly prospective; the evidence suggests that this is simply not an area for serious oil production.
In light of the fact that OREO is currently producing no oil or revenue, and has no reserves of oil and gas to value, investors should look to the balance sheet of the company to arrive at a fair value. Based on the most recent 10-Q the company has approximately $203K in current assets. Since then, the company has also raised an additional $400K in 2 private placements, as outlined in Note 7 of the 10-Q and this 8-K. Valuing these assets at 100% of book value, one arrives at a value of $603K for OREO's current assets. Additionally, the 10-Q lists the book value of OREO's Oil and Gas properties as $1.28 million. This figure is based on the capitalized historical development costs of the properties. Because the company has not proven up any reserves, or produced any oil from these properties, it would be fair to simply assign book value to these properties, but to be generous, let's value them at 5x book value. Adding up OREO's assets, we arrive at a value for the assets of the company of approximately $7.0 million. Based on the shares outstanding figure in the 10-Q and adding in the subsequent private placement shares, one arrives at a shares outstanding figure for OREO of 105.45 million. After subtracting OREO's $73K in liabilities, this translates to a value of approximately $0.065/share, representing approximately 93% downside from the closing price of $0.94/share on May 8, 2012.
At current levels, OREO's stock appears substantially overvalued and seems positioned to perform poorly in the months ahead. There is a significant overhang of very low-priced stock associated with management's liberal policies regarding printing new shares via stock splits and sub-10 cent financings. Perhaps most troubling is management's questionable past associations with defunct and promoted resource exploration stocks that resulted in shareholder losses of ~90% or more. OREO has no oil production, no revenue, no reserves of oil/gas and minimal liquid assets. Despite the recent 50%+ decline in the stock price, at $0.94 the company still has an approximate $100 million market capitalization which at this point seems totally inappropriate based on the business fundamentals. A more reasonable, still generous valuation for the company based on its intrinsic value today is around $6.9 Million or $0.065/share. This represents over 90% downside from current levels and therefore prospective or existing investors should approach shares of American Liberty Petroleum with extreme caution.
Disclosure: I am short OREO.ob. I receive no compensation to write about any specific stock, sector or theme.